Tuesday, October 30, 2007

Open interest in NYMEX’s (COMEX) gold futures contracts breached an all-time high of 500,000 this week. Never have so many traders been betting for — or against — gold than right now.

So… you might ask… where’s the smart money, long or short?

“‘The funds’ are long about 46% of the market,” reports Ed Bugos from Vancouver, referring to investors who’re betting the price will go up. “‘The commercials’ are short about 63% of the market,” eyeballing banks. The funds and commercials are a good guide to where your money should be.

“Throughout the ’90s and all the way through 2006,” Ed says, “the funds were right in gold and the commercials were wrong — like clockwork.”

“Starting in October 2005, over a nine-month period that followed record “fund” longs, gold rallied almost $300, or over 70%.” Ed’s looking for a repeat this year. We’ll keep you posted…

Gold closed on Friday at $783.90, another 27-year high. Gold is therefore only $16.10 below $800, which has been my upside target for this year. The gold chart below suggests we may soon exceed that price.

So why did I just sell my mini-gold contracts? Well on a hunch - though I believe this is what caused the hunch:1. The dollar is due for a pop.2. I am not sure the Fed will cut rates. I thought about this over the weekend, then the WSJ confirmed that the Fed is debating whether or not to cut, not how much to cut. This could cause a pop.

Hey, the trend of the dollar is down. And the trend of gold is up. So if you are short the dollar and long gold, you'll be OK in the longer run. But I thought I'd try to make a cute short term trade out of this.

On Friday I sold all of my Euro and Aussie $ positions. Both ended the week in a flurry, with the Euro topping 1.44 and the Aussie $ topping 0.92.

This rally was thrilling, but ultimately made me too nervous to stay in the positions. Everyone today is bearish on the dollar - and when that happens, it's due for a rally. It may be hard to believe, but it wouldn't take much for it to pop.

Ultimately the trend is down, but it's rare for something to go straight down. For example, what if Bernanke surprised everyone and held rates? Surely the dollar would pop then. I'm not saying it's going to happen, but it's scary right now with everyone on the same side of the trade.

It was a nice buying opportunity for some currencies yesterday, but the window didn't stay open long. I'm glad I had time (and the guts - it wasn't an easy call) to pull the trigger.

From the Daily Pfennig's Chuck Butler:"Good day... And a Terrific Tuesday to you! Well... I sure received a shock yesterday morning... After ranting about the euro, blah, blah, blah... I hit the send button, and then got ready for work... After arriving, and turning on my currency screens, I saw euros had fallen 2 whole euros! That was in less than an hour!

OK... Now my tail was between my legs, and I whimpered off to a company meeting. After an hour and a half, I returned to my desk to see that the euro had bounced off its low, but still much lower on the day from where it stood overnight! So, what caused this huge sell off? Well... Margin calls on stock losses was a reason... And so was a technical correction...

The margin calls on stock losses can also be blamed on the sell off of Gold too... As the day went on... Stock recovered, which meant risk was creeping back into the markets, and led to Carry Trades being put back on... Japanese yen, lost the luster of the 113 handle it held yesterday morning.

So... Does this change everything I said yesterday about the G-7 giving the markets the green light to sell dollars? NO! And I still believe that the euro will be trading up to 1.50 within the next 6 months..."

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